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Response to Issues Paper on Anti-Money Laundering Reform
To: Anti-Money Laundering Unit
Attorney-General’s Department
From: Interactive Gaming Council (“IGC”)
Subject: Response to Issues Paper 4 on Anti-Money Laundering Reform
Date: 19 March 2004
Introduction
The following has been prepared by the Interactive Gaming Council (IGC) in response to the Attorney-General Department’s Issues Paper 4 on Anti-Money Laundering Reform in the Gambling Industry and demonstrates the association’s willingness to work toward effective regulation of the online gambling industry.
The IGC fully supports the Government’s attempt to raise public awareness of the Government’s decision to reform Australia’s anti-money laundering (AML) system in line with new international standards.
The IGC is an international non-profit trade association comprising the leading worldwide interactive gambling companies. Members are either operators of online gambling sites, software suppliers, eCommerce providers, information-providers or otherwise associated with the industry.
The IGC advocates for regulation of the online gambling industry through compliance with an industry code of conduct where players’ interests are protected. Members’ sites operate in a reasonably transparent fashion, and operators comply with the licensing and regulatory policies of their respective jurisdictions.
The IGC believes that online gambling should be subject to the same regulatory requirements as regulated land-based gambling organizations. This would include independent investigations of the backgrounds of key persons and owners, as well as assessing the financial capability of the company to carry on its operations in a competitive fashion. The regulatory infrastructure envisaged requires a cooperative approach between industry and government.
Money Laundering Defined
Money laundering is defined in the draft EU 2nd Directive on Prevention of the Use of the Financial System for the Purpose of Money Laundering as the:
· conversion or transfer of property, knowing that such property is derived from criminal activity or from an act of participation in such activity, for the purpose of concealing or disguising the illicit origin of the property or assisting any person who is involved in the commission of such activity to evade the legal consequences of his action;
· concealment or disguise of the true nature, source, location, disposition, movement, rights with respect to, or ownership of property, knowing that such property is derived from criminal activity or from an act of participation in such activity;
· acquisition, possession or use of property, knowing, at the time of receipt, that such property was derived from criminal activity or from an act of participation in such activity;
· participation in, association to commit, attempts to commit and aiding, abetting, facilitating and counseling the commission of any of the actions mentioned in the foregoing paragraphs.
The IGC does not dispute this definition.
Money Laundering: Regulation as a Solution
Money laundering occurs with attempts to convert illicitly obtained funds, predominantly cash, through wires or similar channels for other means. Online gambling does not lend itself to any form of cash movement because of the online nature of the business, specifically, there is no face-to-face contact in the business. Wire transfers, although subject to the banking system’s stringent wire rules initiated following September 11, 2001, are not generally used. If a regulatory structure were imposed in the online gambling sector, what exposure does exist would certainly be mitigated.
A comprehensive regulatory infrastructure and compliance within the licensing jurisdiction similar to the regulatory philosophies that apply to leading land-based gambling jurisdictions is the solution. With new technologies, there is a need for governments to review how they regulate (not what they regulate), even more so as geographical borders “disappear” in the electronic medium of eCommerce. In the opinion of the IGC, this applies across all forms of eCommerce where online gambling is but one of the sectors within this industry. A higher degree of cooperation between industry and governments is needed, ideally with a common, recognized set of regulations and standards.
The Australian draft regulatory model for online gambling (the AUS Model) is indicative of the standard of regulatory oversight proposed for online gambling, a copy of which can be found at:
http://www.treasury.nt.gov.au/ntt/licensing/gaming/2The%20Aus%20Model.shtml
Essential components of a strict regulatory regime for online gambling, in addition to preventing potential money laundering, need to include the establishment of player protection measures to safeguard minors, problem/compulsive gamblers and revenue and to ensure the integrity of products and probity of those involved. Attempts to prohibit rather than regulate the industry have resulted in driving some operators underground, ostensibly to jurisdictions with less stringent controls that do not wish, or intend, to cooperate with anti-money laundering (AML) measures as promoted by the Financial Action Task Force (FATF) document and supported by the general community.
The IGC made a submission to FTAF in relation to the previous 40 Recommendations and supports FATF’s revised Forty Recommendations designed to combat money laundering and the complementary Special Recommendations to combating the funding of terrorist acts and terrorist organizations,
It is noted that the Financial Transactions Reports Act 1988 (FTR Act) to date has required gambling providers to:
· obtain the required information and verify signatories to account facilities provided for clients;
· keep records of account and identification related information for seven years after the account is closed;
· report significant cash transactions of $A10,000 or more;
· report any suspicious transactions; and
· report any international funds transfer instructions.
As stated in the Issues Paper, the FTR needs to be amended to reflect the use of modern technologies.
Technological, and previous manual, tools, including biometrics, data cross checks and age verification software, are currently available to the online gambling industry. Combined with computerized screening mechanisms (monitored by regulators) this will be more effective than existing land-based measures in satisfying regulatory oversight and compliance. Land based casinos and some other forms of land-based gambling do not offer a ready audit trail for cash transactions (i.e. table games versus gaming machines). This is a requirement for online gambling, which, when combined with a stringent player registration process, is a significant step in satisfying the know your customer (“KYC”) requirements.
Using software technology tools, online gambling operators can scrutinize “inconsistent” behaviour, capture and report the transaction, and freeze the funds pending investigation. When performed in conjunction with a licensing authority this is a potent weapon. The IGC contends that individuals / organizations that attempt to launder money are not risk takers and if they believe that there is a disproportionate risk associated with the transaction they will abandon their efforts. The IGC believes that a stringent regulatory environment increases their risk and would minimize attempts to launder money.
Other Threats Inherent in the Growth of Internet Commerce
Suggestions that the industry can easily lend itself to laundering have thus far proved unfounded as there has yet to be a documented instance when a customer has used a legal and well-regulated online gambling site to launder money. In fact, non-gambling eCommerce sites lend themselves more to this activity because of the undue attention paid to gambling sites and the lack of vigilance of these non-gambling businesses. What the FATF identifies seems to be those instances where an online gambling site was used to launder the proceeds of other crimes or when illegal online gambling sites launder the proceeds of their illegal activity. This type of activity can be perpetrated through any eCommerce “cash flow” business, especially where oversight is less stringent. There is no indication that legal online gambling sites have laundered money (the FATF Money Laundering Typologies 2000-2001 report, 1 Feb. 2001 - www1.oecd.org/fatf/FATDocs_en.htm).
In fact with online gambling, credit card association and ecash providers require that refunds (winnings or return of funds) are always returned to the originating source of the funds. The IGC is aware that its members have policies that prevent funds transfers to parties other than the individual who originated the transaction. Moreover, its members require that identification for material refunds be provided from one or more sources from the following list, a list that is similar to identity requirements that apply to casinos that operate in accordance with the same EU Money Laundering Directive as UK casinos:
· passports;
· tourist cards;
· driving licenses (with photo);
· national identity cards;
· military passports or ID cards;
· pensioners’ ID cards;
· student travel cards;
· government and corporate ID cards (but only if they carry a photo, first names, surname, date of birth, name of issuing body, issue number and bearer’s signature).
A more significant threat lies with online auctions where items with a minimal “real” cost can be “sold” for $1,000 and the profit then laundered at the online auction house. Further areas of concern include the use of spam and Internet Web sites to advertise an envelope stuffing work-at-home "opportunity" and use of the Internet to advertise "discount" Web hosting services. Such activities have been detected in the USA where the crimes have targeted consumers nationwide through junk email solicitations or fraud on eBay, Yahoo! and other popular Internet auction sites.
If regulated, conceivably there would be compliance to ensure that the industry satisfies KYC rules and reacts to change through enforcement mechanisms.
Specific Items from Issues Paper 4
Issue 1.1
As stated in the Issues Paper, FATF has recommended applying a threshold approach to anti-money laundering obligations for particular industry sectors. Applying this approach to the gambling industry in Australia would require:
· procedures to verify the identity of all customers engaging in financial transactions equal to or above the recommended threshold; and
· procedures for retaining transaction and customer identification records to enable ready access by regulatory bodies for a set period.
The above is already present in the online industry for those operators regulated in a strictly regulated environment such as Australia. These regimes require detailed player registration and verification procedures, relying on the strict KYC requirements of the financial sector, and, coupled with limits of one account per player and a requirement for payments to be made only to that player’s account there are ready made checks and balances to ensure Issue 1.1 is addressed.
Issues 1.2 to 2.2
As discussed above, the online industry, in conjunction with the financial sector, has inbuilt systems available to address whatever limit the authorities deem to be appropriate and for the monitoring of both regular and occasional customers. A threshold approach should be consistent with other industries, or at least those involved with eCommerce, and consistent with other countries where similar measures are implemented.
With regard to customer identification online, not only is there an initial verification process but there is also ongoing confirmation of a customer’s identity each gaming session through the use of a unique identifier akin to PIN numbers used in the banking system. Some operators maintain a regular follow up with players to ensure player details are up to date.
To maintain an electronic audit trail for all transactions, online gambling operators should only accept payments from a player by any of the following methods:
a. Credit cards
b. Debit cards
c. Electronic Transfer
d. Wire Transfer
e. Personal Check
f. Any other generally accepted payment method recognized by the financial industry.
In processing transactions there is also the use of positive and negative databases as a risk management tool to assist in minimizing fraudulent credit card / payment activity. Again, stringent regulation requires a system of administrative and operational internal controls be established and that segregation of duties apply. As with any business, sound business practices go a long way towards minimizing risk.
Issues 2.3 and 2.4
With regard to offshore banking transactions, online gambling operators should not accept wire transfers or other payments from institutions identified by the FATF and contained on FATF's list of Non-Cooperative Countries and Territories. Compliance programs should have enhanced security, monitoring and due diligence procedures for players and transactions from countries which pose a heightened risk of money laundering as identified in FATF’s list of Non-cooperative Countries and Territories. Any attempted transactions involving these countries or territories should be reported immediately to the appropriate authority in the Member’s jurisdiction.
As with all businesses engaged in financial transactions offshore, it may be deemed desirable for online gambling operators to cross-check customers against the FBI Control List and the Office of Foreign Assets Control’s (OFAC) narcotics trafficking and terrorist lists. Any customers identified on such list should not be permitted to play and his/her account closed. A more practical approach is to enable domestic businesses with offshore customers to cross-check customers against law enforcement lists such as lists promulgated by law enforcement agencies in the licensing jurisdiction, specifically, in Australia. The domestic authorities could provide a one-stop reference point for businesses to obtain up to date information, a much more practical approach.
OFAC offers an email subscription service that provides subscribers with notices about changes and updates to OFAC's web site. This voluntary service allows users to subscribe to a distribution list about financial operations bulletins geared toward the financial operations community.
The link (http://www.treas.gov/offices/eotffc/ofac/automation/) provides more detailed information about E-mail Subscription Services and Browser Synchronization.
Issues 3.1 and 3.2
The IGC agrees with consistency in approach, whether in the area of wire transfers or any topic. As stated elsewhere in this document, the online industry has an advantage with the use of modern technology to underpin its business operations.
Issues 4.1 to 4.5
The IGC believes that online gambling operators should have anti-money laundering programs in place and should also ensure that staff is adequately trained in this facet of the business, both initially and in an ongoing sense.
Notwithstanding the applicable requirements of the licensing jurisdiction, online gambling operators should report suspicious transactions to the regulatory authority and terminate a player’s account where the operator reasonably believes the player has engaged in a suspicious transaction. A non-inclusive list of suspicious transactions includes:
a. Counterfeit / Fraudulent Check
b. Counterfeit / Fraudulent Credit / Debit Card
c. Large Transactions with Minimal Gambling (False Drop)
d. Gambling on Both Sides of An Even Bet (Trends)
e. No Apparent Business or Lawful Purpose
f. Use of Different Monetary Instruments
g. Use of Multiple Credit or Deposit Accounts
h. Unusual Use of Wire Transfers
Without wishing to reiterate the IGC’s push for regulation of the industry, an important feature of such a regime is conducting background reviews of all potential employees prior to employment to assess character, integrity and history of law enforcement problems. Persons with histories of law enforcement problems or other questionable backgrounds should be denied employment in the industry.
Online gambling operators should conduct an ongoing program of employee training for money compliance issues. Topics covered include (i) activities prohibited by anti-money laundering laws; (ii) types of activities which are considered to be suspicious and create risk of money laundering in the gaming industry; (iii) internal procedures which are required to be followed under the operator’s anti-money laundering compliance program.
The operator should appoint a senior level manager to have responsibility for overseeing compliance by the operator with anti-money laundering statutes and implementing the Member’s anti-money laundering compliance program.
The operator’s anti-money laundering compliance program should be set forth in a written document consisting of internal policies, procedures and controls to be used for anti-money laundering compliance. The policies and procedures should be established based upon the size, complexity and countries of operation of the operator’s business and should be updated as required to reflect changes in the operator’s organizations and applicable law.
The operator should conduct auditing of the anti-money laundering compliance program at least annually to test its effectiveness. Such audit should be conducted by either an independent auditor or internal employee of the operator other than the Anti-Money Laundering Compliance Officer. The results of such audits should be provided to the Compliance Officer, the operator’s senior management and the committee of the Board of Directors charged with overseeing money laundering compliance.
The operator should maintain written records of its anti-money laundering compliance activities for a minimum of 7 years or consistent with the requirements for financial record retention. Such records should include copies of all Suspicious Activities Reports, Transaction Reports and other reports filed with government agencies (including back-up and investigation records), copies of training materials, and copies of the operator’s compliance policies and procedures.
The IGC supports a risk based approach to this issue and also supports cooperation between industry and government agencies. Independent monitoring of an online gambling operator’s risk management as it pertains to anti-money laundering efforts can only assist in strengthening the industry’s efforts.
What the Future Holds: Nations Begin Debate on Online Gambling Regulation
In its Consultation Paper on money laundering (CP46), the UK’s FSA (Financial Services Authority (“FSA”) as enshrined in the Financial Services and Markets Bill), recognized that a comprehensive, regular and effective training program is vital in the fight against money laundering. This clearly is the role that the IGC expects to play with its membership and in conjunction with bodies such as the FATF, and, if invited, with the Anti-Money Laundering Unit within the Attorney-General’s Department.
With the emphasis on KYC, online gambling operators, like financial institutions, do not have the benefit of face-to-face transactions, relying instead on the technology and pragmatic solution to overcome this impediment. The FSA’s new anti-money laundering measures, as a first big step, require affected parties to take as many as four separate pieces of evidence of an individual’s identity as part of acceptable KYC procedures.
Moreover, most operators, partly in response to regulatory requirements in their respective jurisdiction, require their licensees, during the registration process, to obtain information from customers that can be used to verify their identity - name, personal residence address, date and place of birth, telephone number and email address, etc. This information can be cross-referenced with credit card registration information, wire instruction and other similar information. The confirmation information plays an important role with the release of unusually large refunds or deposits.
Furthermore, financial institutions that contribute to the deposit cycle contribute to the verification process with their at-source checklist. These include credit card issuers, financial institutions that maintain the customer’s bank accounts from which wires are transacted and emerging e-cash intermediaries.
Technology will continue to provide the tools to identify suspicious transactions and the record keeping to account and report these suspicious transactions.
Proper regulatory oversight and compliance will incorporate laws and procedures to ensure the suitability of owners, managers and others involved in gambling activities and help to prevent money laundering.
Regulatory Recommendations for Online Gambling
The IGC endorses oversight and regulation of online gambling to prevent money laundering and underage and compulsive gambling. The U.K. has recently been a hotbed of activity with regard to online gaming. The U.K. Review of Gaming made certain recommendations for regulating the industry and providing protections against money laundering. To that end, the IGC endorses the following recommendations from the UK Review of Gaming, activities that would have already been adopted by responsible, reputable online gambling operators:
30.32 We recommend that all punters who register to play online should be properly identified before they are permitted to play. The Gambling Commission should issue guidelines to ensure that identification standards are comparable with those of off-line casinos.
30.33 We recommend that online operators should make any payments only to the debit or credit card used to make deposits into the punter’s account (to the amounts permitted under card association rules), or by cheque to the punter.
The IGC also supports the recommendations of the UK’s Department for Culture, Media and Sport in their review of the Review of Gaming in the UK. In these cooperative environments between government and industry, AML controls become an integral part of the overall regime and all parties work, in their mutual interest, toward crime-free environment.
The latest information about the UK Gambling Bill and policies can be found at: http://www.culture.gov.uk/global/publications/archive_2004/gambling_bill_additional.htm
Relevant authorities should consult with industry, especially leading industry groups such as the IGC, to achieve a cooperative resolution to issues confronting the industry and government. The forum for this cooperation could well be in the context of self regulatory organizations working in conjunction with various government groups. For example, in Europe the Council of Europe and the institutions of the European Community have been formulating positions on matters such as money laundering, customs, and immigration violations. A cooperative program on a range of gambling cooperation matters would supplement other awareness-raising and training activities.
It could be done, for example, in tandem with the regulated industry and/or with international governmental organizations. The IGC foresees a key role for the association in this process, including, but not limited to, ensuring that appropriate training programs are made available (including assistance to develop) to its members.
In the medium to long term, interested governments may want to construct a framework to deal comprehensively with a wide range of gambling regulation matters. The most efficient structure would involve appropriate industry groups such as the IGC in a forum to exchange ideas to deal with emerging problems in the regulation of online gambling.
The Challenge of Globalization
New technology, specifically the Internet, and the resulting borderless marketplace has complicated traditional gambling issues and facilitated new types of gambling, including government products.
The acceptance of a global market for online gambling is a reality unless the Internet itself it banned, which is unlikely. Rather than allow the industry to continue in uncharted territory, regulation is needed to solidify, instill confidence and to create a new government revenue source. Otherwise, some online gambling will continue unregulated and move underground.
Lastly, the question of prohibition needs to be addressed. The IGC urges the Attorney-General’s Department to move away from any measure to deputize sectors within an industry, for example ISPs or financial institutions, and instead focus on working with members of the online gambling industry to develop workable controls and regulation.
The IGC looks forward to further discussions and to participating in the development of procedures for the online gambling industry. The IGC would welcome the opportunity to meet with the representatives of the Anti-Money Laundering Unit and is committed to working with this Unit and bodies such as FATF to advance the common cause of industry and governments. Please contact Mr Rick Smith, Executive Director, at (604) 732-3833 or via email at rick.smith@igcouncil.org.
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